The Reserve Bank of Australia is forced to cut rates to below 1.25 %

Paul Bloxham, Chief economist at HSBC Bank Australia ltd, on China retail market

Former Treasury official and chief economist at Standard Life Investments Jeremy Lawson mentioned that government has invested a lot of capital in some unpopular things that actually are not going to be the critical determinants of whether Australia's potential growth rate and productivity growth ends up being lifted. Do you believe that officials decided to tackle the wrong problems in the first place?

It actually has been a fairly remitted reform from officials in general. To my mind the government needs to be more focused on things like construction and infrastructure, at the same time continuing deregulate the labor and product market. Moreover, it is necessary to find the ways to strike off some of the regulation that we have in Australia. However, these are the sorts of things that we need to do in order to promote growth.

If the Reserve Bank of Australia is forced to cut rates to below 1.25 % in response to any move by the United States to defer raising interest rates, do you expect the residential property prices to spike?

I do not think that you really need to see interest rates going that low to witness the Australian property prices pick up, since they are already rising quite strongly. At the national level they are 8% year on year running up 23% since the drop in the middle of 2012. Hence, I believe that even with the interest rates set at 2.25% is just where it is to see the housing market boom. Moreover, I think that in the given circumstances we starting to see a spectacular dynamic in the Sydney market. Therefore, to my mind, Sydney is already potentially starting to over-inflate, given where interest rates are already.

What events will determine Aussie behavior until Q1 2015 and what are your forecasts for AUD/USD, in a shorter and longer term?

The biggest headwind for the Aussie in Q1 will be pretty much dependent on the Federal Reserve rhetoric, in the sense that it is mostly a foreign story rather than an Aussie story that is driving the AUD/USD trend at the moment. As to the AUD/USD we look for 0.72 by the end of 2015 and 0.70 by the end of 2016.